Holy Cow! And Chicken! And Pig!

Near the end of last year, yours truly took a chance by penning some bullish thoughts on an obscure group of companies: meat stocks[1].

The risk wasn’t in making a bad call — I’ve made them before, and will make them again. The risk was in posting an idea that was so obscure, and so weird, that nobody would care to read it no matter how right I was.

Well, all I can say is, it’s fun to be right.

That goofy group of companies that provide you with chicken, beef and pork have also provided investors with surprisingly meaty gains in 2013. The industry has gained a very respectable 30% since the end of 2012, easily topping the S&P 500’s 18% year-to-date advance.

Tyson Foods (TSN[2]) is up 55% since that look. Pilgrims Pride (PPC[3]) has jumped 155%, and Hillshire Brands (HSH[4]) shares have rallied 20% in the meantime. Smithfield Foods (SFD[5]) was eventually bought out at a price 45% above where it was trading in December. And, my favorite pick at the time — Hormel Foods (HRL[6]) — is up nearly 40% since then.

But the $64,000 question now is whether these meat stocks can keep it up.

Rotten Meat

Just as a refresher, these stocks had been hammered over the course of 2012 thanks to a devastating drought that put a serious stranglehold on crops used to feed the chickens, pigs and cows that eventually become breakfast, lunch and dinner.

Last year’s corn harvest, for instance, ended yielding up about 25% less than the United States Department of Agriculture had originally forecast early in the year. That’s a big shortfall.

The net result of what seemed like a tightly supply, of course, was soaring corn prices. Corn costs jumped from $5.56 per bushel in June of 2012 to a record high of $8.28 just seven weeks later. And, smack dab in the middle of a drought at the time, many assumed corn prices would only continue to rise. Ditto for wheat, soybeans and other alternatives to corn as feed for livestock.

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Since feed is the single-biggest expense for livestock farmers, investors understandably assumed meat prices would either get beefed up to the point where (1) consumers couldn’t afford to buy it, or (2) meat companies like Tyson and Hormel would be forced to take losses to keep their prices marketable.

But a funny thing happened on the way to the so-called “Aporkalypse” …

The Patty Gets Flipped

What happened to foster such a big, bullish reversal of fortune for the meat industry? Well, it’s not so much what happened, but what didn’t happen.

What didn’t happen was the end of the world, proverbially speaking. Corn prices eased off to $6.80 per bushel by the end of the year, and shares of Hormel, Tyson and the others all started to recover. It was a tepid rebound, however, and it was clear investors remained hesitant to trust that corn prices would remain low, let alone keep falling.

Big mistake. As I wrote then:

“A good crop — or even just more rain — in 2013 could make this year’s corn crunch nothing more than a fading and irrelevant memory in the near future. But, to the extent we can look at the future, yes, there’s more upside in the cards for the meat industry. We have to assume rainfall will return to normal next year, and we have to assume all four of these names will reach their slightly elevated target growth levels in 2013.”

Sure enough, not only is the nation not dealing with a drought this year, but 2013’s nationwide rainfall is ahead of the norm in many regions[8]. Corn’s growing just fine. In fact, it might be growing a little too well.

While farmers and meat producers had no particular reason to expect another drought in 2013, the echoes of 2012’s dry spell were still ringing as this year’ growing season began. Corn prices were holding right around the $6.60 per bushel level through Q2. In early July of this year, however, the USDA reported that much more corn had been planted in the United States[9] this year than initially expected … about 2% more, to be precise. It’s a huge disparity by nationwide crop standards.

The end result: Corn prices fell overnight from $6.85 per bushel to $5.32. In the meantime, corn has continued its slide all the way to $4.72 per bushel.

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Meat producers are loving the glut.

Expired Meat

As enticing as big gains are from any equity, the rally in meat stocks has clearly been produced by a plunge in feed grain prices that was just as violent as 2012’s unbridled rally. Like that rally though, this plunge wasn’t built to last.

That’s not to say corn prices are going to make a beeline back to $8 per bushel. That’s not even to say corn won’t edge a little lower before it’s all said and done. It is to say, however, that meat stocks have already realized the bulk of their potential, and don’t offer enough upside from here to risk the downside inherent given the current situation.

In other words, take the money and run.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

ahead of the norm in many regions: http://water.weather.gov/precip/index.php?yday=1294272000&yday_analysis=0&layer%5b%5d=0&layer%5b%5d=1&layer%5b%5d=2&layer%5b%5d=4&layer%5b%5d=5&timetype=RECENT&loctype=STATE&units=engl&timeframe=last180days&product=dep_normal&loc=stateTX

much more corn had been planted in the United States: http://igrow.org/agronomy/profit-tips/cattle-corn-comments-july-1-2013/